Common Investing Mistakes that BURN Money

My current investing philosophy is pretty simple, like many others in the Financial Independence community I stick to low-cost index funds (not just VTSAX, that is too boring) and am in it for the long haul. Based on our net worth progression and the fact that I run a finance blog you might think we have always had it together. Some sort of investing guru that has never made a mistake. That is MOST definitely not the case. I have made my fair share of common investing mistakes.

How does investing in an edible Chinese alcohol stock sound to you? Like a winner? Been there! I wish that was it, but I have a bunch more for ya below.

Common Investing Mistakes that BURN Money

If you keep it simple and stay consistent, it is hard to go wrong in the world of investing. You may not get the BEST returns out there, but you will at least be in the ballpark. If you are doing a bunch of things to follow, I have some bad news for you

401K Selection/Allocation

I recently admitted that I wasn’t a 401k pro because I didn’t get the company match right away. Going to take those poor 401k skills one step further. I had no clue what I was doing when I made my elections.

When they passed out the materials, explaining the different default options I didn’t look past the single word for each grouping of investments. There were three classic choices:

Aggressive

Moderate

Conservative

I took a few seconds to think it over and decided that a moderate mix was best for me. I didn’t consider myself aggressive but also didn’t want to be a complete wimp. This is where I get a bit conflicted in saying this is a mistake.

The wrong mix is better than NO mix

I would rather people invest conservatively than not at all.

The real mistake came in not taking the time after my initial election to learn and adjust as I was more comfortable making investment decisions. For my age and goals, the standard aggressive option isn’t even as aggressive as I invest now.

Pick a default allocation, learn and adjust as you gain confidence in your investing skills. If this space doesn’t interest you at all, I would look into hiring someone to help with your allocation. I have heard horror stories of people having 401k balances sitting in cash for years, well worth the money to pay someone if you don’t want to manage it at all.

Not getting the match

Yep. Again.

Let’s relive my personal finance blogger sin one more time (even though I did Max Out My 401k for the first time in 2018).

I didn’t get the full match when I was eligible and it took me a while to figure it out. Thankfully it was when I wasn’t making that much $ but it is still passing on free dollars. Get the match, it is mandatory and that is as much time I want to spend on this section.

Day/Swing Trading

In 2012, I had paid over $5,000 in student loan interest, which prompted me to start googling and consuming vast amounts of personal finance content. I read books and blogs that had a ton of great advice on responsible saving and investing strategies (that I use today).

Wanting to put some of that knowledge into action, I opened an E*Trade account. I started to do some research using their tools and noticed something interesting

Stocks are volatile, and the smaller the company the more volatile they are

I decided to shit all over that advice and knowledge I acquired in the previous step. I was going to get rich quick by capitalizing on the volatility.

From there I went down a crazy stupid rabbit hole of betting on earnings calls, following a site that was packed full of day traders to get the scoop, learning about “technical indicators” and reading historical charts. After about a year of screwing around making way too many trades, I got caught playing the wrong stock on the wrong day. Wiped out almost all of my gains for the year.

Overall, I was technically “up” playing this game but there were a few things that made me realize it was not sustainable:

Playing during a raging bull market makes it seem easy

It takes a shit ton of time to research, prepare and monitor

Trading fees add up quick

Taxes eat up a significant amount of your profits (if you have them)

On top of that, you have to be RIGHT.

A lot.

Very, very few people make money this way. Most give it a shot, learn a relatively “cheap” lesson and move on to bigger and better (but slower) things. Do yourself a favor and skip this step.

And Yes, for those that are wondering this is where I dabbled in the edible alcohol stock.

Panic Selling

I am putting this financial mistake after Day/Swing Trading for a reason. After seeing your money fluctuate in microcap stocks including one that was accused of fraud and subsequently tumbled 50% in 1 day. I totally get why people would hit the panic button. It sucks to watch your balance drop when it is largely outside of your control.

I think panic selling comes primarily from 2 things:

lack of education

I don’t mean general personal finance knowledge we should all be getting in high school (although that is important and would probably help). I mean studying the history of investing. Stock market corrections, crashes, and fluctuations.

Preparing yourself for one (or two, or three) and thinking about how you will react when it ultimately happens.

“You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.” – Warren Buffet

Take a minute to think about that.

A new investor with $2,000 loses a grand

Amore established investor with $200,000 loses $100,000. That could be multiple years of your take-home pay.

I am a big fan of using math to make points about compound interest, but the mental side of investing can turn that math into steaming pile of losses if you aren’t prepared and bail.

Not understanding your risk tolerance

Risk tolerance feels more like an art than a science to me. There are a bunch of calculations, recommendations, and quizzes you can take to help guide you. I feel like they fall down since they deal with theoretical examples (AKA not actual dollars in your account).

This is one of those “Know thyself” situations. Prep yourself with an education, but if you really can’t sleep or know you will panic sell it is better to take your risk down to a level where you can ride it out.

Paying Too Much in Fees

I will go back to the 401k for this example, but it can happen in any account type at almost any financial institution. When I threw the dart to make my 401k selections I was placed into funds that didn’t have my best interest in mind. There were lost cost options, that matched the high-cost funds I was placed in. The kicker, the low-cost options had better long term performance.

I was paying more for poor performance

I let this go on for far longer than my “missing out on the employer match” mistake. This falls into the bucket of it is better to invest even with higher fees than not at all. But letting it go on forever can cost your thousands or tens of thousands of dollars.

Common Investing Mistakes: Take-Aways

There is a common theme throughout this post.

It is OK to make a common investing mistake. In fact, I would rather have you make a mistake than not try or not invest at all. The key is to learn and iterate your way out of the mistake. It took me a long time to be comfortable enough to go in and create a manual investment portfolio inside my 401k.

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I made similar mistakes as yourself, like not meeting my employers 401k and not investing in my 401k. I now understand how much fees can work against you over the long haul. In a few months, we should hopefully be able to max out our 401k yearly contribution with an aggressive allocation.

I’ll be interested to see how our risk tolerance changes as we invest more money. At this stage I feel like we are very aggressive, but who knows if that will last. Thanks for sharing.

I made a few of these, too! My worst sin is not getting money into retirement accounts early. I didn’t have a match, so I didn’t miss that – but I did miss years of tax savings and potential returns. Ouch.

My dumbest move was betting heavily on individual stocks, some penny stocks, and thinking I was smart. That boneheaded move cost me a few pretty pennies when I only had a few pretty pennies. I wish I had that money back. Live and learn, I guess

Great post! I made the mistake of picking the high expense ratio funds in my 401k at first. Quickly fixed that (I was a lot younger and did not realize there were differing fees). But still my 401k fund selection is not great and most have much higher fees than funds from Vanguard or Schwab… oh well.

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